Liabilities of Managing Director

8/6/2019 Liabilities of Managing Director

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LIABILITIES OF MANAGING DIRECTOR

The following is an illustrative list of defaults for which a Managing Director can be liable as an officer in

default.

i. Under Section 44(3) of the Act, default with respect to filing a statement in lieu of prospectus bya private company which, as a result of alteration of its Articles ceases to be a private company,

within a period of thirty days after such alteration would render the company and every officer

of the company in default punishable with a fine which may extend to Rs.5000 for every day

during which the default continues.

ii. Most of the provisions of the Act dealing with requirements to be fulfilled in respect if theissuance of prospectus do not use the phrase the officer in default in order to attribute

liability in case of default. However, under Section 72(3) of the Act, default with respect to

observing the requirement that no allotment of shares or debentures in pursuance of a

prospectus should be made until the beginning of the fifth day since the day on which the

prospectus is first issued by the company, shall make the company and every officer of the

company in default punishable with fine which may extend to Rs.50,000.

iii. Under Section 73 (2) of the Act, in case of default in complying with requirements such asrepaying the moneys of the applicants for shares within 8 days after the company becomes

liable to pay it by virtue of its permission for listing on a stock exchange not having been

granted, the company and every director of the company who is an officer in default shall be, on

the expiry of the eighth day, jointly and severally liable to repay that money with interest at

least at the rate of four percent.

iv. Under Section 80 of the Act, companies limited by shares are barred from issuing irredeemablepreference shares. In case of default the company and every officer of the company who is in

default can be punished with a fine that may extend up to Rs. 10000.

v. Under Section 113(2) of the Act, if default is made in complying with the requirement ofdelivering share certificates within three months of the allotment of the shares and within two

months after the application of transfer, in accordance with the procedure laid down under theAct, it will render the company and every officer of the company in default punishable with a

fine which may extend to Rs.5,000 for every day during which the default continues.

vi. Under Section 150 of the Act every company shall keep in one or more books a register of itsmembers, and enter therein the following particulars:

the name and address, and the occupation, if any, of each member;

b. in the case of company having share capital, the shares held by each member and the amount

paid or agreed to be considered as paid on those shares;

c. the date at which each person was entered in the register as a member; and

d. the date at which any person ceased to be a member.

vii. If default is made in complying with the above mentioned provisions, the company, and everyofficer of the company who is in default, shall be punishable with fine which may extend to

Rs.500 for every day during which the default continues.

viii. Under Section 193(6) of the Act, default in maintenance of minutes of all proceedings of everygeneral meeting and of all proceedings of every meeting of the Board of a company as specified

under Section193 will result in the company, and every officer of the company in default being

punishable with fine which may extend to Rs.500.

ix. Under Section 209A of the Act, default with respect to keeping the books of accounts andpapers of every company open to inspection during business hours by the Registrar of

Companies or officers of the Central Government or such officers of the Securities and Exchange


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Board of India as may be specified by it in this behalf or default with respect to furnishing any

information related to the affairs of the company as may be required by such person will make

every officer of the company who is in default punishable with a fine not less than Rs. 50,000

and also imprisonment of a term not exceeding one year.

x. Under Section 219(3) of the Act, default with respect to sending a copy of the balance sheet(including the profit and loss account, the auditors report and every other document which is

required to be annexed to the balance sheet) which is to be laid before a company in a general

meeting at least 21 days before the meeting to the members of the company will make the

company and every officer of the company who is in default, punishable with fine which may

extend to Rs. 5,000.

xi. Under Section 232 of the Act, default with respect to complying with the provisions of the Actdealing with the procedure for the appointment or removal auditors, observance of minimum

qualifications provided in the Act with respect to the person appointed as auditor; complying

with provisions of the Act dealing with audit of the accounts of the branch office of a company;

non-compliance with Section 230 dealing with reading of the auditors report in the general

meeting etc. shall render the company and every officer of the company who is in default,

punishable with a fine which may extend to Rs. 5000.

xii. As per Section 598 of the Act non-compliance with the provisions under the Act for foreigncompanies, i.e. companies incorporated outside India which have established a place of business

within India, in delivering certain documents containing certain particulars, as specified in

Section 592 of the Act to the Registrar of Companies; in rendering its accounts to the Registrar

of Companies etc., will render the company, and every officer or agent of the company who is in

default, punishable with fine which may extend to Rs.10,000 and, in the case of a continuing

offence, there will be an additional fine of Rs.1,000 for every day during which the default

continues.

xiii. As per Section 541 of the Act, where a company is being wound up, if it is shown that properbooks of account were not kept by the company throughout the period of two years

immediately preceding the commencement of winding up, or the period between the

incorporation of the company and the winding up of the company, whichever is shorter, everyofficer of the company who is in default shall, unless he shows he acted honestly and in the

circumstances in which the company was run, the default was excusable, be punishable with a

term which may extend to one year.

xiv. Section 629A of the Act provides that in case of the violation of any of the provisions of the Actfor which no specific penalty is provided all officers in default will be punishable with a fine

which may extend to Rs. 5,000. If the contravention is a continuing one, with a further fine

which may extend up to Rs.500 for each day after the first day during which the contravention

continues.

Liability of the Managing Director in the Course of Winding up Proceedings

Criminal liability cannot ordinarily be affixed on to the Managing Director of the company in the course

of winding up proceedings, since in the course of liquidation, the legal dues of a company can be

realised only by attaching the assets of the company and not by putting the Managing Director or any of

the directors in prison. However, the Court has held that where a company suffers loss on account of

breach of duty on the part of a director or the Managing Director, he is liable to compensate the

company to the extent of such loss. The liability of the Managing Director for breach of fiduciary duty by

misfeasance proceedings in the company's winding up is well recognized. During the course of winding

up proceedings of a company, the directors may be made personally liable by order of the Court only if

they are found guilty or fraudulent trading, i.e., an act of misfeasance or the like.


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One example of such an instance is provided under Section 543 of the Act, as per which Court is

empowered, the course of winding up of the company, on application, to examine the conduct of any

person who has taken part in the promotion/formation of the company, or any past or present director,

Manager, liquidator or officer of the company who has apparently (a) misapplied, or retained, or

become liable for the money/property of the company; or(b) been guilty of any misfeasance or breach

of trust in relation to the company. The Court may compel such person to repay the money owed or pay

damages, even though such person may also be criminally liable

The court further held that where the Managing Director of a company in liquidation had failed to take

action for realisation of certain debts owing to the company and the debts became time-barred before

the winding up order was passed by the Court, it would be a fit case for passing a decree against the

Managing Director for the amount of the debts. The court thus ordered the Managing Director in

question to reimburse the company for the amount of the debts. In Expo Expert Private Ltd. v. Jai Gopal

Angrish and Others, it was held to have been proved on record that the Managing Director did not

initiate any steps to recover the amount due from the defaulting party and the same became time-

barred. The Court thus ordered him to re-imburse the company. However, if the official liquidator did

not allege fraud or dishonesty on the part of the Managing Director for not recovering the amount for

the company and held him liable merely for the reason that the debts had become time-barred, thesame would not amount to misfeasance.

Documents

Liabilities of Managing Director